Public Bill Committee

[Mr. Jim Hood in the Chair]

Clause 214

Consolidated fund

Angela Eagle: I beg to move amendment No. 28, in clause 214, page 102, line 9, leave out UK authorised institution and insert bank or other financial institution.

Jimmy Hood: With this it will be convenient to discuss Government amendments Nos. 29 to 31 and Government new clause 3Financial institution.

Angela Eagle: The purpose of the clause is to put the use of public money in the proposed bank resolution or insolvency arrangements, or in the provision of financial assistance to banks, on a more regular footing. The Treasury has the power, as a matter of common law, to make loans to any person or to give them financial assistance in any form, but it has the money to make those loans or to make good on any commitment it has given only if Parliament, rightly, provides the money in estimates. The annual Appropriation Acts can give full statutory cover for expenditure on estimates, but in line with the Public Accounts Committee concordat of 1932, specific enabling legislation is normally required to enable the finance for a new service to be provided from public funds. That is what the clause provides.
Clause 215, which fits with this clause, enables the Treasury to draw money from the national loans fund to make loans to financial institutions where it needs to do so urgently to protect financial stability. Financial crises can arise at any time and it might not be possible to get an estimate approved quickly enough for the Treasury to make a loan from voted money, most obviously during a recess when Parliament is not sitting.
As originally drafted, clauses 214 and 215 provided for loans or financial assistance to be given only to UK authorised institutions that have permission to accept deposits, in other words UK deposit takers. It was realised in the light of recent events, including those surrounding the Icelandic banks, that such a limitation could make it more difficult to protect the interests of UK consumers or safeguard the interests of UK taxpayers where there is a failure of an overseas institution. The amendments address that limitation which, as we all know, has been shown to be actual rather than potential in the last few days.

Brooks Newmark: I am curious about what the Minister is saying about the clause. Has there been any thinking as to the spread over the cost of Government capital when they make that sort of financial assistance? Is there a fix in mind? Have there been discussions about it? Will it be at the Governments cost of capitalwe are curious to know what that isor will it be at a very large spread, as we have seen recently? The cost of capital loaning to the banks is something like 10 or 12 per cent., which seems extraordinarily high, given the Governments cost of capital.

Angela Eagle: It would be an individual policy decision in a certain circumstance. Each situation might be different. The proposal is a much simpler thing. It gives cover for lending the money and puts it on a proper footing. In other words, because of the 1932 PAC concordat, where it looks as though money might need to be provided on more than one occasion, specific legislative approval is needed for that kind of process, rather than just using contingency funds. That is all the clause does. It does not talk about what the cost of capital would be. It would be wrong to think about putting any cost of capital in primary legislation, for obvious reasons.
The clause simply regularises, in accordance with the 1932 PAC concordat, as Parliament expects that if such expenditure could occur in the future, there should be specific legislative mention of it. This kind of clause appears in all sorts of bits of legislation. It is not unusual. It merely enables the potential use of money in that way to be regularised by statute. It does not go into any kind of detail about circumstances or what the cost of capital would be if such an issue were to occur.

Mark Hoban: May I ask the Minister about subsection (3)? She referred to the limitations that have been identified through events at Icelandic banks. Would the Governments action be outside the scope of the existing law if subsection (3) were not included?

Angela Eagle: My understanding is that that is not the case, and that there is existing cover using estimates, but contemplating such expenditure to rescue banks in trouble has not previously occurred in this way. So far, it has been covered by using the contingency funds voted by parliamentary estimates.
The combination of clauses 214 and 215 shifts the way in which we propose to cover the situation in future. First, clause 214 regularises the situation in terms of the PAC concordat by providing a particular statutory undertaking rather than relying on contingency funding. Secondly, clause 215 says that the best place from which to provide the money is the national loans fund rather than the Contingencies Fund, for reasons that we can go into when we discuss that clause. The amendments widen the capacity for using that process to non-UK deposit-taking banks, following the issue with the Icelandic banks. That is all the clauses do. They do not go into great detail about other circumstances.
There is a common law power, which means that everything that has been done to date is lawful, but because of the 1932 PAC concordat, the idea is not to rely on common law powers for ever into the future if an issue comes up that may result in such expenditure reoccurring. The PAC concordat is that if something that had not existed or been appreciated, but might require forward expenditurethe present situation is an examplethe Government will take a specific power for those circumstances, rather than simply relying on common law powers. That is a bit of a techie point, but that is all it is.

Brooks Newmark: I have another question, but if I am off base, perhaps the Minister will let me know.
I know that there are EU financial assistance rules, and I wonder how the new legislation ties in with them, or whether it is even relevant to them. Were they taken into account when drafting the Bill?

Angela Eagle: Obviously, a range of structures, national, EU and international, come into play when unexpected global events occur that affect entities with a global presence or with branches or part of the entity elsewherefor example, Landsbanki in the UKalthough they are regulated elsewhere. If the hon. Gentleman is referring to state aid, he is right: the clause is compatible with state aid. If he is referring to other EU rules, he will have to be more specific.
We do not believe that the clauses do anything to put us into conflict with EU rules. The point is technical and narrow, and ensures that our expenditure is properly and specifically accounted for, rather than being subject to common law, which is what the then Government arranged with the PAC in 1932.
Clause 214 is not unique. Its provisions appear in other legislation where a possible circumstance has been identified in which expenditure might have to be made. In such a case, the usual rule is to make proper legislative provision for it, which is what the clause does. It is nothing more or less than that.
I have introduced the amendment and we have talked a bit about the clause as well, but I am happy to answer any further questions that hon. Members may have.

Mark Hoban: May I make a plea to the Minister? As hon. Members will recollect from our proceedings on the Finance Bill, when Government amendments were tabled, they were occasionally accompanied by explanatory notes, which assisted Members from all parties who were perhaps not privy to the thinking of Treasury officials. The Minister has acknowledged the technical and, indeed, techie nature of the measure, so is it possible to provide such notes for some of the Government amendments?
I turn now to the amendments and new clause 3. The original drafting made explicit the group of institutions to which financial assistance could be provided: UK authorised institutions and institutions that were deposit takers. I understand the point the Minister made about non-UK institutions, but I do not know the precise legal status of ING, to which the retail deposits of, I think, Kaupthing and Heritable were transferred. I had assumed that if ING Direct was an incorporated limited company in the UK, it would have already have been picked up under subsection (2)(b). However, if it was a branch of the Dutch parent would it, on that basis, fall outside subsection (2)(b)? I would be grateful for clarification about the contrast in status between branches and UK subsidiaries of overseas entities.
I could understand the position if the amendments were limited to deleting UK; the Ministers explanation would stack up quite well and I would be happy to move on. However, I am concerned that the way in which the amendments have been drafted means that they go beyond banks. Amendment No. 28 refers to
bank or other financial institution.
On that basis, it could be an investment bank, which may not be a deposit taker in the strict definition of subsection (2)(b) or it could be an insurance company, an investment manager, an insurance broker or even an independent financial adviser. I am not sure how widely drawn
bank or other financial institution
is or why the Government believe it is necessary to have such a broad definition in the Bill. The breadth of clause 214 is extended by new clause 3, which gives the Treasury the power by order to
provide that a specified institution, or an institution of a specified class, is or is not to be treated as a financial institution for the purposes of section 214 or 215.
I understand that would work on a case by case basis, so I am not sure why the Government might want to decide, or have the power to decide, to exclude a specific category of institutions from the definition of
bank or other financial institution.
It would be helpful if the Minister could clarify that point because I am not entirely sure whether the measure gives the Government much wider powers to give assistance to financial institutions that are beyond the scope of the Billfor example, to an insurance company.
Reports in the papers during recent weeks have suggested that there is some concern about the solvency of insurance companies. I do know whether the powers are sufficiently broad to enable Government financial assistance to be given to insurance companies, not withstanding the narrow scope of the Bill. Will the Minister explain why the terms have been drafted so widely and what the relevance of the power in new clause 3 is? Will she confirm that the financial assistance will not be used for any purpose beyond the limits set out in the Bill?

Angela Eagle: On the hon. Gentlemans point about explanatory notes for amendments, we are happy to try to provide them if the Committee feels that they are of assistance. We will get on with that for future aspects of the Bill, so I hope that is helpful.
The hon. Gentleman asked why there was such a broad definition in the Bill, and why the original drafting had been expanded by the amendments. It is partially because events have demonstrated that our original drafting was too narrow for us to achieve the aim, for systemic reasons, of stabilisation of particular institutions, which is what the Bill is about. Simply, the Landsbanki events demonstrated that the provisions as originally drafted were too narrow.
The hon. Gentleman asked where the bank ING was incorporated. He was rightit is incorporated in the Netherlands, so, but for the amendments, it would fall outside the provisions of subsection (2). The original drafting of the Bill would have made it harder for us to handle the situation that occurred. To be clear, however, we do not have any plans to provide financial assistance to INGjust in case anyone gets the wrong idea about that.

Mark Hoban: I take on board the Ministers comment about ING, but we could have dealt with that issue by just removingwell, not just removing; that makes it sound far too simplethe provision that relates to UK authorised financial institutions and using a broader definition of authorised financial institutions. The measure before us, however, would go further than even deposit takers.

Angela Eagle: Yes, the definition of financial institutions is broad; it could include banks, building societies, holding companies, investment firms and investment banks; but, given the complex nature of relationships in particular examples, flexibility is needed so that powers exist to react appropriately if a circumstance involves different forms of arrangements that fall outside the original, narrow drafting of the Bill. That is why we have tabled the amendments. We have to be flexible. If, for reasons of stabilisation, there were a need to direct assistance, the amendments would mean that we had the power to direct it where it was needed.

Mark Hoban: Am I right, therefore, in assuming that if it was decided, for whatever reasons, that Standard Life, which has a banking subsidiary and is owned by an insurance company, were to acquire the deposits of another licensed deposit taker, the amendments would enable assistance to be given to the parent company; whereas, under the previous rules, we would not have been able to assist the parent company but could have assisted the banking subsidiary?

Angela Eagle: I do not want to get into using particular examples or names, for rather obvious reasons. We are not talking about existing institutions that are in difficulty, so I do not want to use the hon. Gentlemans phraseology with respect to particular institutions. However, he is right in essence: the provision is about the flexibility to deal with a circumstance that may present itself in a particular instance where there are different arrangements. We do not want to predict them in advance, but we want to have the power to direct assistance and not allow too narrow a definition of financial institution. It would defeat the overall object of the Bill, which is, in certain difficult instances, that assistance be directed where it solves the problemthat, I suppose, is the simplest way of putting itand the amendments would do so. The power could not be used to bring things that are clearly not financial institutions within the scope of the clause, so we will not be rescuing plumbing companies. The difficulty, however, is that there is no clarity about what a financial institution is, and of course what one is may change or evolve. For example, we have recently seen the emergence of those who issue e-money. Such evolution of financial arrangements will continue.
The amendment will give us the scope to direct financial assistance where it is needed to solve a problem. We are not specifying particular problems. Systemic problems may emerge that have not been anticipated and do not fall within the narrower wording in the clause. The amendment will give us the flexibility to direct assistance where it is most needed. Otherwise, we may suddenly find that the arrangements that have evolved do not fit the powers.

Mark Hoban: I am grateful for the Ministers explanation. I am beginning to understand the proposals. She mentioned people providing e-money. I guess that is the type of institution referred to in new clause 3, which will give the Government powers to specify a group of institutions as financial institutions. The obvious definition would be financial businesses that are not regulated by the Financial Services Authority, which could fall within the scope of new clause 3.

Angela Eagle: The idea is to have a broad power that is future-proof in its scope of financial institutions, not to spread the powers beyond that. However, the measures must cope with the innovation that we see happening all the time, which is often technology-assisted. That underpins the amendments. I give the assurance that this is not a power to go off into other areas of the economy or to deal with different types of companies. It is trying to capture where this issue may focus if there is a rearrangement or evolution of financial systems. That is often accompanied by technological innovation, which introduces things like e-money. That would not have been picked up by the original drafting of the Bill, but it may need to be if we are talking about systemic risk and the ability to move in and protect depositors.

Mark Hoban: The Minister is tempting me down a route by talking about e-moneyI quite regret having mentioned it. Are e-money systems such as PayPal covered by the banking industrys responsibilities for payment systems under part 5? I am not sure where such systems fit within the regulatory framework.

Angela Eagle: I think the answer is that e-money is regulated by the FSA regulatory framework. That may change in the future; the idea of regulatory frameworks is that they can evolve if the things that they are regulating evolve. Part of the difficulty is that we are trying to pass legislation that is to some extent future-proofed to deal with a fast-moving and innovative part of the global economy. That is why the proposals will broaden the scope of financial institution. I do not want to give examples because such things may not exist yet. The structure of companies that may have to be dealt with in a future credit shock may not yet exist, but we want to give enough scope under these powers for the Treasury and the authorities to deal appropriately with a future systemic problem.
In response to the hon. Gentlemans specific question, I shall have to write to him with details because he has been so innovative that we do not quite know the answer, but I am happy to let him have an answer in writing, if he is concerned.

Mark Hoban: Can the Minister confirm for the sake of clarity that, notwithstanding the broadening of the scope in respect of institutions that can receive financial assistance, they can only receive it under the Bill in connection with parts 1 to 3 and that it will not go wider than the terms of the Bill?

Angela Eagle: That is a reasonable question. Under the powers in the Bill, assistance can be provided other than in connection with a special resolution regime for reasons of economic and systemic stability. One of the most obvious examples of that is the guarantee the Chancellor gave to depositors with Landsbanki, which is not in the special resolution regime. However, some of those powers are required in future to ensure that Landsbanki depositors can be covered, so it is not only about matters within the scope of parts 1 to 3.

Mark Hoban: I am now pleased that I asked the question, because the Ministers answer goes further than the clause suggests. Clause 214(1)(a) says
for any purpose in connection with Parts 1 to 3 of this Act.
Parts 1 to 3 deal with the special resolution regime, stabilisation powers, bank administration and bank insolvency, but I do not think that the guarantee given to depositors with Landsbanki and the other Icelandic banks is covered by subsection (1)(a).

Angela Eagle: That is true, but clause 214(1)(b) goes beyond the special resolution regime, as the hon. Gentleman will see if he looks at it. It refers to
a UK authorised institution (other than in respect of loans made in accordance with section 215).
Subsection (1)(b) takes the powers slightly wider than the hon. Gentleman suggested. However, that is for the general good, for protecting depositors and thereby for safeguarding financial stabilitythat is the connectionbut not only, necessarily, within the insolvency situation of particular banks.

Mark Hoban: I am grateful to the Minister for drawing my attention to subsection (1)(b). I am not trying to be difficult, but paragraph (b) would be fine if the definition was related to licensed or authorised deposit takers. However, the change in the definition of a UK authorised institution to include a bank or other financial institution gives the Government powers to give any financial institution money, not necessarily in connection with parts 1 to 3. That makes the scope wider than I had anticipated, given the nature of the Bill. I am not sure what safeguards there are to prevent a Government from using the provision to give financial assistance to any financial institution. There is no natural or obvious limit in the clause, given the breadth of definition that we are now introducing in the Bill.

Angela Eagle: I do not think that the hon. Gentleman is trying to be difficult. He is right to probe the issues. He asks why the definition is wider than the scope of parts 1 to 3 of the Bill. I ask him to bear in mind what we are trying to do with the Bill, which is to have a system that can be preventivethat allows earlier intervention to prevent more of a systemic breakdown, if that is appropriaterather than having to wait until a bank has entered the special resolution regime, for example. It may not always be appropriate to wait until something has collapsed to provide financial assistance; it may be appropriate to offer assistance at an earlier stage of the process to ensure that we prevent damage that might happen if we are prevented by law from intervening earlier.
For instance, it might be appropriate to offer assistance to prevent a company from entering the special resolution regime, or to support a bank to stabilise it. The guarantee offered to depositors in certain institutions and the recapitalisation scheme itself are recent examples of action that stabilises before a collapse can happen. Therefore, we think that it would be wrong to wait until the bank entered the special resolution regime to be able to provide assistance to it, and that is for preventive reasons.
I do not think that any Government would want to go around injecting capital into banks for charitable purposes. It is done to prevent a systemic collapse and there are safeguards against the improper giving of money to financial institutions.
The measure is an enabling power. It does not mean that it will be appropriate to give assistance to financial institutions willy-nilly, or just because we wake up one morning and decide that it might be a good idea. It has to be for the reasons that we have all discussed during our debates on the Bill and indeed during the passage of the Banking (Special Provisions) Act 2008.
We also have to put it on the record that we need to ensure that we get value for money for the money that we give, so the clause is about ensuring that regular parliamentary powers apply to money that is given, rather than using common law, and the powers go wider than perhaps the hon. Gentleman had thought and also perhaps wider than our original drafting, simply because of the fact that lessons have been learned recently. The clause is about acting in a timely fashion to prevent a worse situation happening, which can sometimes mean acting proactively before a crisis erupts in its full form.
Having given those reassurances, I hope that the hon. Gentleman will be happy with the amendments.

Mark Hoban: Actually, I think I can help the Minister. I appreciate the point that she is making about wanting to ensure that we can give financial support before the special resolution regime is invoked or before insolvency or administration. That is entirely reasonable.
I just wondered whether in subsection (1)(b) the financial assistance could be restricted to deposit-taking institutions, so that the paragraph would read, in respect of, or in connection with giving, financial assistance to or in respect of a bank or other deposit-taking institution. I want to get round the issue about when it is a UK branch or a UK-incorporated company. So, effectively one can give financial assistance in respect of a deposit-taker in the UK, but that financial assistance can be provided to a bank or other financial institution. So we are trying to restrict the circumstances in which the money can be given but broaden the people who the money can be given to.

Angela Eagle: Why would the hon. Gentleman want to limit assistance in that way when doing so would mean that the powers of intervention might not be able to cope with a particular instance? We obviously cannot anticipate when assistance will need to be given to protect UK depositorsLandsbanki is an obvious example.

Mark Todd: I appreciate my hon. Friends willingness to take examples and apply them. If a major insurance institution that provides important support to deposit takers found itself in difficultywe can recognise straight away one such institution across the pond that was the focus of Government interventionwould not some flexibility to respond to another financial institution that is not a deposit taker but is intimately connected with the support of deposit taking be an important requirement in the Bill?

Angela Eagle: My hon. Friend, as he often does, has got straight to the point. I apologise if I have been waffling around it. The hon. Member for Fareham asked whether we should limit those powers to deposit-taking institutions, but recent experience shows that other types of institution can also get into difficulties. My hon. Friend is right in the sense that AIG, the largest insurer in the world, had to be bailed outwe can use that example because the Fed did it. It is especially appropriately in the current climate that we take powers that enable us to provide assistance to other institutions.
I would like to reassure the hon. Gentleman that we have no immediate plans to provide money to insurers or investment companies, but we think it prudent in the current circumstances to take powers that are wide enough to cope with any systemic situation that might occur, rather than narrowing them. I emphasise that that is in the context not only of the Bill, but of the need for proper value for money through appropriate Government expenditure. No Government want to have to put money into a private sector company, but some are so important to the economy and the world financial system that, if needs be, they must be supported. The hon. Gentleman is trying to narrow those powers and limit their potential use, even though we hope that they will not have to be used often, if ever again. He is wrong to think that narrowing them in the current circumstances, considering the interconnectedness of the financial systems, is the right thing to do at this time.

Mark Hoban: I appreciate the Ministers comments. Importantly, the debate has established that the Government are looking for powers to give financial assistance to any class of financial institution that could pose a threat to financial stability. I might not quite have understood the Ministers opening remarks, but that is quite an important power, and that needs to be acknowledged when looking at the matter.
In essence, that power will give the Government the opportunity to provide financial assistance to any financial institution, regardless of whether it is an authorised deposit taker or is helping to stabilise an authorised deposit taker. It could be used to provide financial assistance to a company such as AIG, if we had such a company in the UK. It could be used to provide financial support to an AIG-type institution, even if it is not a deposit taker. It is just now that I have got to that point. The breadth of the power that the Government are seeking goes way beyond the original wording of the Bill.

Angela Eagle: Obviously, there has to be a systemic risk. The hon. Gentleman is right about insurers that are bound up in systems that may, in the end, lead to deposit-taking institutions after following a trail of instability back to a particular place. It may be the case that in certain circumstances a power to stabilise such an organisation is appropriate.

Mark Todd: To try to be helpful, perhaps the focus therefore should not be on defining more closely the institutions that one might assist but the purpose that one would follow in assisting. We may come to this when we discuss financial stability in broader terms shortly, but perhaps a sharper definition of the purpose for intervening in the marketplace in this way might be of more assistance than querying the institutions that might be assisted.

Angela Eagle: Yes, but given that we have the Banking (Special Provisions) Act 2008 and are now seeking to replace those powers with a more permanent statutethat is what this Committee is doing this morningthe context is clear. I re-emphasise that there are limits on the power to spend value-for-money state aid and propriety limits. In the context of the Bill, we are discussing systemic risk, where the consequences of allowing something to fail are much greater because of its systemic importance than the consequences of intervening to save it.

Mark Hoban: The hon. Member for South Derbyshire made a valid point about purpose. I am not sure that the purpose is as clear as it could and should be. In her responses to interventions, the Minister clarified the breadth of the power, but this is a Banking Bill, not a financial stability Bill. If there were some way of linking the use to which funds under clauses 214 and 215 could be used for the purpose of the financial stability objective, which is the context for the Bill, it would be helpful in giving people a clear view as to the purpose for which and circumstances in which the money could be used.

Amendmentagreed to.

Amendment made: No. 29, in clause 214, page 102, line 15, leave out paragraphs (b) and (c).[Angela Eagle.]

Question proposed,That the clause, as amended, stand part of the Bill.

Clause 214, as amended, ordered to stand part of the Bill.

Clause 215

National Loans Fund

Amendments made: No. 30, in clause 215, page 102, line 26, leave out UK authorised institution and insert bank or other financial institution.
No. 31, in clause 215, page 102, line 28, leave out subsection (2).[Angela Eagle.]

Clause 215, as amended, ordered to stand part of the Bill.

Clause 216

Bank of England

Mark Hoban: I beg to move amendment No. 58, in clause 216, page 103, leave out lines 9 to 11.

Jimmy Hood: With this it will be convenient to discuss the following amendments:
No. 48, in clause 216, page 103, line 9, leave out , consulting the Treasury, determine and.
No. 49, in clause 216, page 103, line 11, at end insert
and monitor the delivery of that strategy.
No. 59, in clause 216, page 103, leave out lines 13 to 19 and insert
(1) There shall be a committee of the Bank, known as the Financial Stability Committee of the Bank of England, consisting of
(a) the Governor and Deputy Governor of the Bank,
(b) two members appointed by the Governor of the Bank after consultation with the Chancellor of the Exchequer, and
(c) four members appointed by the Chancellor of the Exchequer.
(2) Of the two members appointed under subsection (1)(b)
(a) one shall be a person who has executive responsibility within the Bank for financial stability analysis, and
(b) the other shall be a person who has executive resopnsibility within the Bank for financial stability operations.
(3) The Chancellor of the Bank of England shall only appoint a person under subsection (1)(c) if he is satisfied that the person has knowledge or experience which is likely to be relevant to the Committees functions and after consultation with the Governor of the Bank.
(4) The Treasury Committee of the House of Commons may hold an inquiry into any appointment made under subsection (1)(c)..
No. 50, in clause 216, page 103, line 13, leave out from a to consisting in line 14 and insert Financial Stability Committee.
No. 68, in clause 216, page 103, line 14, leave out from of to end of line 19 and insert
8 non-executive directors of the Bank appointed by the chair of the court of directors (designated under paragraph 13 of Schedule 1)..
No. 51, in clause 216, page 103, line 17, at end insert
two other executives of the Bank appointed by the Treasury, and.
No. 52, in clause 216, page 103, line 18, leave out from 4 to end of line 19 and insert
other members appointed by the Treasury following a transparent appointment process overseen by the Commissioner for Public Appointments.
(1A) A person appointed under subsection (1)(c)
(a) must not be an executive of the Bank or a member of the court of directors of the Bank;
(b) must not be an active participant in financial markets;
(c) should have recent experience of financial markets, knowledge of legal or accountancy matters relevant to the special resolution regime under the Banking Act 2008, and international experience..
No. 53, in clause 216, page 103, leave out lines 21 to 23.
No. 62, in clause 216, page 103, line 21, leave out from first to to implementation in line 22 and insert decide upon the.
No. 70, in clause 216, page 103, line 21, leave out from first to to first the in line 22 and insert monitor.
No. 69, in clause 216, page 103, leave out lines 24 to 29.
No. 60, in clause 216, page 103, line 24, leave out give advice about and insert decide.
No. 61, in clause 216, page 103, line 27, leave out give advice about and insert decide.
No. 54, in clause 216, page 103, leave out lines 30 to 32.
No. 71, in clause 216, page 103, leave out lines 33 to 35.
No. 55, in clause 216, page 103, line 33, leave out court of directors and insert Treasury.
No. 56, in clause 216, page 103, leave out lines 42 to 43.
No. 57, in clause 216, page 104, line 16, leave out to (e) and insert or (c).
No. 63, in clause 216, page 104, line 23, at end add
(3) At the end of section 2(1) of the Bank of England Act 1998 insert and the Financial Stability Objective.
Clause stand part.

Mark Hoban: This will be a long debate, as it includes a significant number of amendments and the clause stand part debate. I shall use the stand part debate on clause 216 to deal with the financial stability objectives set out in proposed new section 2A to the Bank of England Act 1998. This is an important area of the Bill because it deals with some of the changes to the institutional architecture in the tripartite arrangements, and in particular it deals with the scope of the Bank of England and how it carries out its duties.
The Bank has two functions under clause 216. First, it has a statutory objective of committing to protecting and enhancing financial stability, which is set out in proposed new section 2A. Secondly, proposed new section 2B establishes the financial stability committee, which will be a sub-committee of the court of the Bank of England, chaired by the Governor. I have tabled two groups of amendments to the clause. One groupamendments Nos. 56, 58, 59, 60, 61 and 62would make the financial stability committee a wholly executive body within the Bank of England. The second groupamendments Nos. 68, 69, 70 and 71would make it a wholly non-executive body. I have done that to stimulate debate within the Committee about the role of the financial stability committee, where it sits within the Bank, and what its powers and authorities are.
The Treasury Committee report on banking reform said:
The House of Commons should not be invited to consider and approve arrangements for the Financial Stability Committee as they standwith proposals of uncertain origin and with the purpose and composition of the Committee yet to be determined. This is because the committee is in danger of failing in both its executive and scrutinising functions as it is as drafted, a hybrid body.
That is the concern that we have. I want to use this debate to tease out the hybrid nature of the committee.
With regard to those amendments that would make the financial stability committee an executive body, the model that I have used is the Monetary Policy Committee. For the financial stability committee to be as effective as the MPC, there would need to be two fundamental changes to the proposals set out in the Bill; one relates to the composition of the committee and the other to its function.
The strength of the MPC is that it brings together a group of experts, some from within the Bank and some from external appointments, with a wide range of views. One only has to listen to the views of David Blanchflower today to understand the breadth of opinion in the MPC. That provides the creative tension that any committee needs to get to the right answer, using a breadth of views. Bringing in outsiders gives a broader perspective, and the MPC is credible because of the calibre of the appointments and the mix of internal and external appointments.
Given the importance of financial stability decisions, if we are to have a committee with the responsibility to promote financial stability, it is important that there is a clear decision-making process, and that such decisions are made by a wider range of individuals than is currently the case. That is why there should be external members who can give a wider perspective. The amendment tabled by the hon. Member for South Derbyshire suggests the type of person who might become a member of the committee.
It is not only the Treasury Select Committee that suggested there should be expertise; the Chancellor of the Exchequer, speaking in the House of Commons on 5 June, said:
We should learn from the example of the Monetary Policy Committee, and take a similar approach to financial stability, bringing in outside expertise to advise the Governor and the appropriate deputy governor.[Official Report, 5 June 2008; Vol. 476, c. 916.]

Mark Todd: The hon. Gentleman says outside, and one of the critical definitions of that implies outside of both executive and non-executive functions within the fabric. No MPC members currently serve on the court of the Bank, and neither should they. One of the important issues in defining what an outside individual issomething that perhaps the Chancellor muddied slightly in that commentis that a person should be entirely outside any structure within the Bank. Does the hon. Gentleman agree?

Mark Hoban: That is what the debate is trying to tease out. If the financial stability committee is to have decision-making powers, it would be right for outside appointees to be genuinely external rather than non-executive. I will elaborate on that, but as I see it, the role of a non-executive directorin any organisationis one of scrutiny. They are not there to make executive decisions but to hold the executives to account. That is why audit committees of plcs are staffed almost entirelyif not entirelyby non-executive directors. It is the same with remuneration committees. If we ask a non-executive director to perform a role, generally that is in a scrutiny rather than an executive position.
The hon. Gentleman is right to make a distinction about the external appointees. If it is meant to be an executive committee, those people should not be non-executive directors of the court of the Bank of England, in the same way that they cannot be for the MPC. If it is a scrutiny role, they should be non-executive directors, and if it is not a scrutiny role, they should not be, because it muddies the water as to what non-executives should do.
I want to return to the parallel with the MPC. The Treasury Committees report tried to identify the strength of the MPC. It said that it has
a distinct status and authority as the body responsible for the formulation of monetary policy within the Bank of England
It noted that there was a clear separation from the court and said that the MPC had clarity of function. That goes back to the hon. Gentlemans point that there is no blur between oversight and executive powers.
Since the Chancellors statement in June, there has been a lack of clarity. The model now emerging is not akin to that of the MPC or to the scrutiny role that non-executive directors would introduce into the procedure.
Sir John Parker is a senior non-executive director of the court of the Bank of England. To his mind, the financial stability committee would make executive decisions relating to individual actions. That contrasts with the existing financial stability board within the Bank, which is open to non-executives and does not make executive decisions. In his comments, the Governor said that there should be an executive element to the financial stability committee, and that the holder of his post should chair it; otherwise, the committee will not get to grips with the policy issues faced by the Bank.

Sally Keeble: In setting out his views, can the hon. Gentleman tell us what he believes that the scope of the executive decisions should be? That is the critical difference between the MPC and the financial stability committee.

Mark Hoban: If the hon. Lady will bear with me, I will come to that. I have tabled amendments that redraw the scope of proposed new section 2B(2), to try to distinguish between the executive and non-executive functions that the two formulations could set out.
As I was saying, the Government are clearly of the view that the financial stability committee should have executive decision-making powers, and that the chairman should chair it in the same way as he chairs the MPC. That would not be an unreasonable view to take if the committee were to be an executive body. There has been some comment on this matter by the industry. In its response to the January consultation, the Association of British Insurers said that its preferred option would be a separate expert committee, along the lines of the MPC, with responsibility for financial stability. That would allow the court to deal with its more administrative role. However, if the committee is to be an executive body and carry that authority, I am not sure that it can be a sub-committee of the court. That is why we would reconstitute the committee, under amendments Nos. 56 and 58 to 62, to consist of the Governor, the deputy governor, two members appointed by the Governor and four members appointed by the Chancellor. It would then broadly mirror the composition of the MPC.
The Treasury Committee has suggested that the committees functions should include liquidity operations outside the ordinary course of business, such as schemes comparable to the special liquidity scheme; the functionality of payment systems; formulating policy positions with respect to prudential regulation; directing the Banks analytical work on financial stability, including horizon-scanning for potential risks; and decision making in relation to the special resolution regime. That is a reasonable set of functions for an executive body to have.
Amendment No. 62 would tweak proposed new section 2B(2) to make it clear that the financial stability committee would decide upon the Banks financial stability report, and that it is there to make not recommendations but decisions. Amendment No. 60 would require the committee to decide whether the Bank should exercise its stability powers rather than simply give advice. Amendment No. 63 would carve out from the courts remit responsibility for the financial stability objective in the same way that the MPCs objective is carved out of the remit of the court in the 1998 Act.
My amendments set out how the committee could be given a purely executive function, and would ensure that the composition of the committee reflected its executive role, putting it on a par with the MPC in terms of functionality and membership. That is a clear model of how the committee could work, with collective decision making. The amendments would ensure that a range of voices were heard when the committee made decisions about financial stability, and would broaden engagement in decision making beyond the confines of the Bank to include people with relevant external expertise, such as those with recent banking, legal or accountancy experience. However, the external appointees would have to have the credibility to make those decisions in the way that external appointees on the MPC have sufficient credibility to ensure that its decisions are seen as credible in the outside world.
Moving to the second batch of amendments, the Governor might decide, in relation to the tripartite authorities, that we do not want an executive body to make decisions, and that we want them to be made as they have been made in the past few years. What we actually want from the financial stability committee is not a hybrid of executive and non-executive roles, but someone who will hold the executive within the Bank to account. I have sought under amendments Nos. 68 to 71 to bring that about.
Significant arguments can be made for a non-executive body, and I am agnostic about which route we take. There are merits on both sides. I am not intending to press the amendments to a Division, but this is an opportunity to gain clarity from the Government about their thinking.

Angela Eagle: Will the hon. Gentleman explain why he thinks that the interest rate decision made by the Monetary Policy Committee is akin or similar to decisions that would have to be made in respect of contributing to financial stability? One is a lever to be pulled, and is connected to something; it is about the price of money. The other is much more diffuse and cannot be dealt with in the same way as the Monetary Policy Committee deals with interest rate decisions. Will he share with the Committee his thoughts on why the institutional arrangements for making the Monetary Policy Committee decision are akin to those that he thinks the financial stability committee should be making if it is doing its job?

Mark Hoban: We need a clear structure for the decision-making process. There are two models that we could follow: one is to vest the power to make the decisions with the executives of the Bank of England, as happens at the moment, and the other is to give it to a separate committee, the financial stability committee, which could make the executive decisions on behalf of the Bank.
The Minister is right to point out that the MPC meets only two days a month to make the decisionsI accept that I am grossly over-simplifying its role. The committee members undertake a lot of analytical work between meetings. I am not sure to what extent they see their role on the MPC as being full-time; I suspect that many external appointees do see it as pretty much a full-time role.

Mark Todd: An important function of the MPC that could be paralleled in such a way is communication and debate about the credible subject with which it is engaged. Typically, the MPC members visit a substantial number of bodies throughout the country, write articles and contribute speeches to bring home some of the critical monetary policy issues. One of the things that we have learnt about financial stability is that perhaps the debate has not been vigorous enough and that some of the messages have not been heard loudly enough.

Mark Hoban: Indeed. The hon. Gentleman makes a powerful argument for the financial stability committee to be constituted in the same way as the MPC. I shall come back to that point in a minute.
The strength of the MPC in decision making is that the breadth of its appointments provokes and simulates a debate, the point made by the hon. Member for South Derbyshire and, as David Blanchflower demonstrated by his remarks today, there is every breadth of view about some of the decisions. There is positive strength from engaging the wider financial community in a debate about how to gain financial stability. To go back to the Ministers point, the executive committee can meet on a more regular basis than two days a month to make such decisions. If my recollection is rightI think that it isthe court of the Bank of England was convened in the evening after support was given to Northern Rock to advise on the committee. It is not impossible to get a committee together to make decisions so that a continual debate is in progress rather than one that would be seen as discrete and held only on a monthly basis.

Sally Keeble: What the hon. Gentleman has not mentioned, which I asked him about, is the fact that the MPC has a clear target on the inflation figures and, in interest rates, it has a clear lever, which is very focused. It debates wider matters, but its purpose and function is crystal clear and tightly defined in a policy framework set by Government, and it has mechanisms to deal with that. That is different from what he is saying about the FSC, which is an executive committee. He needs to talk about the purpose, functions and mechanisms at its disposal.

Mark Hoban: The hon. Lady makes an important point. In the second half of my remarks, I will expand on the financial stability objective. Clearly, the FSC is there to contribute to achieving that objective. She is right that it is difficult to measure whether that objective is achieved. One knows when one does not have financial stability, but it is not easy to say when there is financial stability. In his remarks to the Treasury Committee, the Governor said that during the period of tranquillity the seeds of the current crisis were being sown. That suggests that it is difficult to determine when there is financial stability. Whether the committee is executive or non-executive, there is a problem of how to measure and monitor its performance.
We could talk about more qualitative measurein evidence to the Treasury Committee, Sir John Parker spoke about a qualitative financial stability objective. That suggests that when there is such a degree of subjectivity, having more voices involved in the debate may be better than having fewer, because that makes it harder to be as precise about whether an objective has been achieved. On more subjective areas of debate, more voices are needed to give different perspectives, rather than there being a house view on how financial stability should be achieved.
I will return to the amendments, because we will discuss the other points in a few minutes. One criticism of having an executive committee centres on whether it can make decisions quickly and whether the decision-making process is sufficiently streamlined. That relates to the point underlying the Ministers intervention. I think that that criticism is legitimate. As I said earlier, I am agnostic on which model should be used, but I do think that there must be clarity, whichever is chosen. As its remit is constituted, the FSC might not be able to make the quick decisions that the Government and others will expect it to make in the context of securing financial stability.
On that basis, perhaps the right model is one of scrutiny, whereby the committee will examine decisions once they have been made rather than have an undefined role in making the decisions. That would send the financial stability function of that committee down a sub-committee of the court route rather than a hybrid route. It would clearly be there to deal with issues of financial stability; it is a sub-committee of the court. The financial stability board already exists within a court structure. The deputy governor for financial stability is the chairman of that board. Non-executive directors attend and attendance is open to all members of the court. The Governor also sits on that committee. It is not clear how the FSC as constituted in the Bill differs from the financial stability board. That is the board that will hold the Government to account.
If the FSC is to be a purely non-executive body, it must have a non-executive majority. It should not be party to executive decision making; its role should be confined to a forum for taking soundings prior to decisions being taken elsewhere by executives. It should be chaired by a non-executive in the same way that audit committees or remuneration committees are chaired in listed companies.
It is always important that we listen to the views of the non-executive directors of the court, who, in their memo to the Treasury Committee in June, outlined their strategic lead role, saying that they could, through the regular reviews that they conduct,
endorse the Banks strategic objectives and work programme in relation to financial stability; to review the linkages between the Bank, FSA and HMT, as well as the Banks own capabilities, to ensure that the Bank is equipped to discharge its financial stability responsibilities; and to review the effectiveness of the Banks work on financial stability issues, including the internal organisation of that work.
That is a good remit for a non-executive committee. It is not clear whether those processes that they already undertake would be incorporated within the FSC. If those are to be incorporated, that does not sit well with having an executive chairman.

Mark Todd: Does the hon. Gentleman agree that there is another area of inconsistency in the Bill? Care is taken to define voting rights and others matters of that sort that might be related more clearly to an executive function, but is there an area of discrepancy in respect of the non-executive roles that he has highlighted? I am not sure that the hon. Gentlemans amendments change all those; as with my amendments, I do not think that he went through with a fine-toothed comb to produce entirely consistent positions. Is there a discrepancy in focusing on exactly how people vote and when they are entitled to do so and having perhaps slightly less material about setting out in law a non-executive function?

Mark Hoban: The hon. Gentleman makes a good point about voting rights. If the body is expected to be a decision-making body, there must be absolute clarity about who votes and where that power rests. With a non-executive body, the process does not need to be as precise. I freely admit that if I were a parliamentary draftsman, I would produce a better, more coherent set of amendments to create the distinction between the two, but these are a peg for debate. The questions about the hybridity of the committee have not been properly addressed. This is our opportunity to do so and the Minister, too, will have the chance to do so in her reply.

Angela Eagle: The hon. Gentleman is right: it is a recognisable option to table two incompatible groups of amendments for debate. However, which amendments does he favour? He has not told us yet.

Mark Hoban: The Minister must have been preparing her speech for later on and not listening to my remarks. I have said on two occasions that I am agnostic about this matter because I can see merits in both outcomes. I am not comfortable with the hybrid nature of the measure in the Bill. These are probing amendments, not ones that I would press to a vote, but I am keen to use them to get the Government to express why they believe that a hybrid model is preferable to either a purely executive or a purely non-executive model. That is the purpose of this debate. I freely admit to having a strong belief in some areas and being agnostic in others. There are not many things in life that I am agnostic on, but this happens to be one of them. I will return to the areas where I am less agnostic in later debates.
The amendments offer two choices. One is to make the financial stability committee a proper executive body, reflecting the strengths of the MPC in terms of its composition and remit and using that as the model of how an executive committee can function. The type of decisions that a financial committee will make must be thought about carefully. There are two choices: are those decisions best made by an executive body constituted in line with the MPC, or are they are better made within the Banks existing decision-making processes, but with stronger scrutiny by the court of directors?
The hybrid model confuses membership, accountability and responsibility. Given the importance of the financial stability objective, it is not helpful for that to be the case. There are other issues connected with the financial stability objective which also make it harder to hold the Bank, whichever model is used, to account.
The hon. Member for Northampton, North looks as though she wants to intervene

Sally Keeble: I am not going to intervene. I want to make a speech.

Mark Hoban: In the expectation that I have finished, perhaps. I am afraid that that is not the case. It is quite a challengeto my vocal cords as well as my powers of recollectionto have a stand part debate after such a complex set of amendments. I will plough on.

Sally Keeble: It is a lonely furrow.

Mark Hoban: The bound copy of Hansard will sell well in Fareham. [Interruption.]

Jimmy Hood: Order. The Committee should let the hon. Gentleman plough on.

Mark Hoban: I will continue to plough my furrow, under your guidance Mr. Hood, no matter how lonely it is.
The financial stability objective forms the basis of one of the more difficult parts of the Bill. It clearly generated quite a lot discussion in the Treasury Committee and in our evidence session a week last Tuesday. We believe it is important that the Bank be given the objective of financial stability as part of its remit. Part of the challenge of the past 12 months or so has been to decide who has this responsibility and how the Bank should play its role.
We are part way through a period of instability and there must therefore be some lessons that we can learn that will enable us to prepare for the future. As I indicated earlier, it is easier to know when we are in a period of instability than when we are in a period of stability. In trying to understand what the objective of financial stability actually is, one needs to consider three questions. First, what does it mean in practice? Secondly, how does one measure it? The hon. Member for Northampton, North made that point well. Finally, what tools does the Bank have to deliver financial stability?
Let me start with the definitional problem first. I accept that it is a problem. The hon. Member for South Derbyshire and I had a debate last week about financial stability and how one defines it. The present Economic Secretary, in his evidence to the Committee, described the concept of financial stability as a high-level one. There has been a debate about the objective. The former Economic Secretary, the hon. Member for Burnley (Kitty Ussher), when giving evidence to the Treasury Committee in July, held out the prospect of a bit more definition than we have in the Bill when she said:
I think we will be setting that out legally in the legislation, so the technical answer to that question will come in October...We will define it clearly, I presume, in the legislation.
Clearly things have changed since she gave the evidence. Not only is she no longer the Economic Secretary, but we have gone from that tantalising promise that was held out to us of a definition to what we have in the Bill, which is:
An objective of the Bank shall be to contribute to protecting and enhancing the stability of the financial systems of the United Kingdom.
I am not sure that that is as full a definition as the hon. Lady hoped it would be, but that is the definition that we have.
The Treasury Committee concludedhaving read the report and the evidence quite carefully I understand why it did sothat there is no consensus about what financial stability means. The report is clear. It sets out the range of definitions of financial stability that could be used. The Governor defined a period of financial stability as
a period during which the payment system worked normally and the ability of households to mediate their savings into real investment in the economy at home or abroad operated normally.
Nigel Jenkinson, who is the executive directorI see that the Whip wishes to intervene. I shall not finish this speech this morning. I will have to continue after the lunch break. I am happy if the usual channels want us to adjourn at this point.
Further consideration adjourned.[Mr. Blizzard.]

Adjourned accordingly at twenty minutes past Ten oclock till this day at One oclock.